When I meet with someone who is considering bankruptcy, one of the answers I frequently get when I ask why they are considering bankruptcy is:

“Because I cannot afford to pay my creditors.”

That is certainly a good reason to consider bankruptcy. But it raises another, more important question:

What is the actual goal of a typical consumer bankruptcy case?

For most people, the answer is simple:

The goal is to obtain a Bankruptcy Discharge.

A bankruptcy discharge is a federal court order that releases you from your personal legal obligation to pay certain debts. It is usually only about two pages long, but it is one of the most powerful documents you can receive from a bankruptcy court.

You can see a sample bankruptcy discharge order here:

Sample Bankruptcy Discharge

The discharge is an order of the United States Bankruptcy Court. It prohibits creditors from attempting to collect discharged debts from you personally after the bankruptcy case is completed.

In my office, the overwhelming majority of Chapter 7 consumer cases result in a discharge. Of course, every bankruptcy case is different, and obtaining a discharge depends upon the debtor complying with the Bankruptcy Code, providing the required information, completing the required debtor education course, and avoiding conduct that could result in denial or revocation of the discharge.

What Does a Bankruptcy Discharge Actually Do?

The bankruptcy discharge releases an individual debtor from personal liability for debts that are discharged under the Bankruptcy Code.

In practical terms, this means that once a debt has been discharged, the creditor generally cannot come after you personally to collect that debt.

The creditor cannot simply decide years later that it wants its money and:

• File a new lawsuit against you to collect the discharged debt;
• Obtain a new judgment against you for the discharged debt;
• Garnish your wages to collect the discharged debt;
• Garnish your bank account to collect the discharged debt;
• Make collection telephone calls;
• Send collection letters demanding payment; or
• Otherwise attempt to collect the discharged debt from you personally.

That is the real power of a bankruptcy discharge.

You may have been struggling with credit card debt, medical bills, personal loans, collection accounts and judgments for years. The bankruptcy discharge is intended to provide what bankruptcy law calls a “fresh start.”

A Michigan State Court Judgment Can Also Be Discharged

Many people believe that once a creditor has obtained a judgment against them in a Michigan state court, bankruptcy can no longer help.

That is not correct.

A judgment is simply a legal determination that you owe money. The fact that the judgment was obtained in a Michigan District Court or Circuit Court does not automatically make the underlying debt nondischargeable in bankruptcy.

For example, a judgment arising from an ordinary credit card debt may generally be discharged in Chapter 7 just as the underlying credit card debt could have been discharged without a judgment.

I have written more about this issue here:

Is My Court Judgment Dischargeable in Bankruptcy?

There is, however, an important exception involving liens. A judgment creditor may have obtained a lien against particular property, and the bankruptcy discharge does not necessarily eliminate that lien.

That distinction is extremely important.

A Bankruptcy Discharge Does Not Automatically Eliminate Every Lien

One of the most common misunderstandings I see is the belief that bankruptcy makes every debt and every lien disappear.

It does not.

There is an important difference between personal liability for a debt and a lien against property.

Suppose you owe $25,000 on a vehicle and file Chapter 7 bankruptcy. If you surrender the vehicle, the bankruptcy may discharge your personal obligation to pay the remaining deficiency after the vehicle is sold.

In other words, if the vehicle is sold for $15,000 and you owed $25,000, the remaining $10,000 deficiency may be discharged.

But the bankruptcy does not simply erase the creditor’s lien while you still own the vehicle.

The same general principle applies to mortgages.

If you want to keep your house or vehicle, you normally must continue making the required payments. The bankruptcy discharge eliminates your personal liability for a discharged debt, but a valid lien securing that debt may survive the bankruptcy.

This is why I tell my clients:

If you want to keep your house or car, you generally need to keep making the payments.

Bankruptcy can eliminate your personal obligation on a secured debt under certain circumstances, but it does not give you the right to keep collateral without dealing with the creditor’s valid lien.

What Debts Are Usually Discharged in Chapter 7?

For most consumer debtors, Chapter 7 can eliminate a substantial amount of unsecured debt.

Examples commonly include:

• Credit card debt;
• Medical bills;
• Personal loans;
• Signature loans and lines of credit;
• Payday loans;
• Certain past-due utility bills;
• Deficiencies remaining after a vehicle repossession;
• Deficiencies following the surrender or sale of certain collateral;
• Deficiencies following a mortgage foreclosure;
• Certain civil judgments;
• Old collection accounts; and
• Other unsecured consumer debts.

This is one reason Chapter 7 can provide such a dramatic financial fresh start.

A person may walk into my office owing tens of thousands of dollars to numerous creditors. If those debts are dischargeable and the person qualifies for Chapter 7, the bankruptcy case can replace years of collection activity with a federal court order that permanently protects the debtor from personal collection on those discharged obligations.

What Debts Are Not Normally Discharged?

Bankruptcy does not eliminate every type of debt.

Some important examples of debts that generally survive a bankruptcy discharge include:

• Child support;
• Alimony and certain other domestic support obligations;
• Many student loans;
• Certain recent income tax debts;
• Certain tax liens;
• Criminal fines and penalties;
• Criminal restitution;
• Certain debts arising from drunk driving or other intoxication-related conduct causing personal injury or death; and
• Certain other debts specifically excluded from discharge by the Bankruptcy Code.

There are also debts that may be nondischargeable because of the debtor’s conduct.

For example, certain debts arising from fraud, false pretenses, embezzlement, larceny, or willful and malicious injury may be challenged by a creditor in the bankruptcy court.

These issues can require a separate lawsuit within the bankruptcy case, called an adversary proceeding.

That does not mean that every creditor who claims “fraud” automatically wins. The creditor generally must establish the legal requirements necessary to make the particular debt nondischargeable.

What About Student Loans?

Student loans deserve special attention because I frequently meet with people who assume that bankruptcy can never help with student loan debt.

The law is more complicated than that.

Student loans are generally subject to special rules governing discharge. Recent changes in the law and Department of Justice guidance have also changed how certain federal student-loan discharge requests are evaluated.

If student loans are a significant part of your financial problem, you should not simply assume that bankruptcy is either the answer or not the answer. Your particular loans and circumstances should be reviewed.

Even when bankruptcy does not eliminate all student loan debt, bankruptcy may still provide substantial relief from other debts and collection pressure.

What About Tax Debt?

Tax debt is another area where people frequently receive incorrect advice.

You may hear:

“Taxes can never be discharged in bankruptcy.”

That is not correct.

Some income tax debts can be discharged if specific requirements are satisfied. Other taxes cannot.

The analysis can depend upon such things as:

• The type of tax;
• The tax year involved;
• When the return was due;
• When the return was actually filed;
• Whether the taxing authority has assessed the tax;
• Whether a return was filed late; and
• Whether a tax lien exists.

Tax debt therefore requires a separate analysis. I do not recommend that anyone simply assume that all of their tax debt is either dischargeable or nondischargeable without having the individual tax years reviewed.

Does the Bankruptcy Court Send Me a List of Every Debt That Was Discharged?

Generally, no.

The bankruptcy court enters a discharge order, but it does not ordinarily send you a separate document containing a line-by-line list saying:

“This debt was discharged; this debt was not discharged.”

That is particularly important with tax debt and other debts that have special discharge rules.

Your bankruptcy attorney should be able to review your debts and explain which obligations were discharged and which obligations survived.

The discharge order itself should also be kept permanently with your important financial records.

I recommend that my clients keep a copy of their bankruptcy petition, schedules, discharge order and other important bankruptcy documents indefinitely.

What Happens If a Creditor Tries to Collect a Discharged Debt?

If a creditor attempts to collect a debt that was discharged, do not simply ignore it and do not automatically agree to make payments.

Contact your bankruptcy attorney.

There can be legitimate reasons for a creditor’s communication—for example, a dispute over whether a particular debt was actually discharged or whether a surviving lien is involved.

But if the creditor is attempting to collect a discharged debt in violation of the discharge injunction, there may be remedies available through the bankruptcy court.

This is another reason it is important to keep your bankruptcy records and know who your bankruptcy attorney is even years after your case has been completed.

What About Chapter 13?

The bankruptcy discharge is not limited to Chapter 7.

A Chapter 13 debtor who successfully completes the Chapter 13 plan generally receives a discharge of debts that are dischargeable under Chapter 13.

Chapter 13 is different from Chapter 7 because you generally make payments through a court-approved repayment plan for a period of years.

Chapter 13 may be particularly useful for someone who:

• Has income sufficient to fund a repayment plan;
• Has mortgage arrears and needs time to catch up;
• Is behind on a vehicle loan;
• Has certain tax obligations;
• Has nonexempt property that could create a problem in Chapter 7; or
• Does not qualify for Chapter 7.

The fact that someone cannot afford to pay all of their creditors does not necessarily mean Chapter 7 is the only option.

Sometimes the right answer is Chapter 7.

Sometimes it is Chapter 13.

And sometimes bankruptcy is not the best solution at all.

That is why the first step should be a careful review of your entire financial situation rather than simply deciding that you need to file a particular chapter.

The Bankruptcy Discharge Is the Fresh Start

When I talk with a potential bankruptcy client, I explain that bankruptcy is not really about the paperwork.

It is not about filling out forms.

It is not about attending a 341 meeting.

It is not about dealing with the bankruptcy trustee.

Those are all necessary parts of the process, but they are not the ultimate goal.

The goal is the fresh start that the Bankruptcy Code is designed to provide.

For someone who has been dealing with collection calls, credit card bills, medical bills, lawsuits, judgments, garnishments and overwhelming debt, receiving a bankruptcy discharge can be a major turning point.

Instead of spending the next several years trying to pay debts that you realistically cannot afford to pay, bankruptcy may allow you to eliminate qualifying debts and move forward.

That does not mean bankruptcy makes every financial problem disappear. You still have to deal with your mortgage, vehicle payments, taxes, student loans and other obligations that may survive the bankruptcy.

But for many people, eliminating their dischargeable unsecured debt is enough to completely change their financial situation.

If you are considering bankruptcy because “I cannot afford to pay my creditors,” the more important question is:

What would your financial life look like if those dischargeable debts were eliminated?

That is what we should discuss before deciding whether bankruptcy is right for you.

I have practiced bankruptcy exclusively for more than 30 years and have represented more than 25,000 people in bankruptcy matters. If you are considering Chapter 7 or Chapter 13 bankruptcy in Southeast Michigan, I would be happy to discuss your situation with you and explain your options.